The year 2025 is shaping up to be a pivotal moment for global economies, marked by significant political and monetary policy shifts aimed at addressing the changing economic landscapes, fiscal challenges, and rising global deficits. The geoeconomic fragmentation continues to disrupt trade and supply chains, forcing nations to adapt their trading arrangements to build resilience. Against this backdrop, private capital is emerging as a key driver of growth, channeling investments into transformative sectors such as infrastructure, generative AI, and royalty assets. This convergence of innovation, technology, and real assets underscores an interconnected global response to the challenges of economic instability, technological disruption, and geopolitical realignment.
The UK’s 2025 Budget, described as “painful” by many, is a stark example of the fiscal challenges governments face. The Labour government’s first major budgetary effort includes significant tax hikes and borrowing measures. Key initiatives include increasing employer National Insurance Contributions (NICs) from 13.8% to 15%, introducing a four-year “FIG” regime to replace the non-domiciled tax system, reforming inheritance tax, raising capital gains tax rates, and implementing a flat 32% carried interest tax effective from 2025. The Office for Budget Responsibility (OBR) projects a modest 2% GDP growth for 2025, while the Bank of England (BOE) is more cautious, anticipating 1.5%. These measures, while aimed at supporting public services, introduce challenges for private investment strategies and consumer spending.
Globally, similar tax adjustments and borrowing constraints are likely to impact investor confidence. The delicate balance between fiscal sustainability and slowed growth poses long-term risks, defining recovery trajectories for governments and markets alike. Monetary policy will play a crucial role in mitigating the effects of pro-cyclical fiscal measures. The Bank of England maintains a cautious stance on inflation, projecting continued pressures despite headline inflation moving towards the 2% target faster than expected. Monetary easing can stimulate growth but risks reigniting inflation, which is currently at 2.6% in the UK. Following its November cut to 4.75%, the market expects further rate cuts in 2025, with base rates potentially falling to around 3.75% by the end of the year.
The BoE’s decisions will hinge on economic indicators such as price inflation, GDP growth, and employment data. Meanwhile, the U.S. Federal Reserve is maintaining steady rates, focusing on labour market strength and wage trends. The European Central Bank (ECB) is set to cut rates again at its first monetary policy meeting of 2025, prioritising concerns over weak economic growth despite persistent inflationary pressures.
Geoeconomic fragmentation and the UK’s trading arrangements will be shaped by US trade policies, shifting geopolitical trends, and the structural challenges of Brexit. Donald Trump’s potential introduction of tariffs on goods imported into the US adds uncertainty. In 2023, the US was the UK’s largest trading partner, accounting for 22% of UK exports and 13% of UK imports. The UK is expected to adopt a symbolic response to prevent exacerbating domestic inflation, reducing immediate economic risks. However, broader themes like Brexit’s structural challenges and geoeconomic fragmentation driven by technological competition and divergent monetary policies are intensifying trade uncertainties. Ongoing economic divergence between the US and Europe could result in global macroeconomic uncertainty.
The private capital industry is poised for significant expansion, driven by rising allocations across all client segments, particularly in private debt and infrastructure. The demand for long-term, profitable assets to match long-term liabilities is a significant driver of this trend, particularly evergreen structures with predictable and stable cash yields. Fundraising efforts are expected to be robust, supported by favourable credit conditions and a resurgence in deal activity. Following the payout of returns, general partners (GPs) are anticipated to seek additional capital in the market from investors. Notably, private equity exits stood at $303.3bn through September 30, 2024, surpassing the $281bn total for 2023, indicating increased liquidity for investors.
Deal activity is expected to see a resurgence in 2025, driven by favourable credit conditions, a backlog of exits, and anticipated
